DR-CAFTA, Textiles, and Apparel

DR-CAFTA, Textiles, and Apparel

Order Code RS22150
Updated May 20, 2005
CRS Report for Congress
Received through the CRS Web
DR-CAFTA, Textiles, and Apparel
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
Summary
The Dominican Republic-Central America-United States Free Trade Agreement
(DR-CAFTA), signed on August 5, 2004, by the United States, Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua, and the Dominican Republic is a comprehensive and
reciprocal trade agreement that, if ratified by all parties, would govern market access of
goods, services trade, investment, government procurement, intellectual property, labor,
and the environment. With respect to textiles and apparel, DR-CAFTA is comparatively
less restrictive than most other trade agreements and trade preference programs
regarding what qualifies for duty-free access to the United States. On the whole, U.S.
apparel manufacturers favor approval of the agreement; textile manufacturers appear to
have differing opinions; most textile and apparel importers support approval. Apparel
makers in the Dominican Republic and Central America see it as helpful in their
competition with Chinese-made goods. This report will not be updated.
The Agreement
On August 5, 2004, the United States, Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua, and the Dominican Republic signed the Dominican
Republic-Central America-United States Free Trade Agreement (DR-CAFTA). It is a
comprehensive and reciprocal trade agreement, which distinguishes it from the unilateral
preferential trade program enacted by Congress as part of the Caribbean Basin Initiative
(CBI), as amended. It provides detailed rules that would govern market access of goods,
services trade, government procurement, intellectual property, investment, labor, and
environment.1
Enacting DR-CAFTA requires legislative action in all signatory countries. To date,
El Salvador, Honduras, and Guatemala have ratified the agreement. The U.S. Congress
is debating it, but implementing legislation has yet to be introduced.
1 For more details on and analysis of the agreement, see CRS Report RL31970, The Dominican
Republic-Central America-United States Free Trade Agreement (DR-CAFTA), by J. F. Hornbeck.
Congressional Research Service ˜ The Library of Congress

CRS-2
Background
To avoid confusion over the meaning of the words textiles and apparel, it may be
helpful to note that “textiles” can include apparel in some contexts, but more technically
it refers to yarn and/or fabric, and sometimes end-products such as bed linen, towels,
window curtains, tarpaulin, tents, etc. “Apparel” means clothing, and usually excludes
footwear, as will be the case in this report. Also, the terms “region” and “regional” used
in this report refers to the Central American countries and the Dominican Republic.
The current trade preference program for Caribbean countries, begun as the
Caribbean Basin Initiative (CBI), is one of three regional programs that Congress has
enacted to ease U.S. trade terms on imports of goods — especially apparel and other
textile end-products — to spur economic growth in poorer regions of the world.2 Textile
and apparel production usually play a large role in early industrial development. U.S.
textile and apparel manufacturers have been losing U.S. market share to developing
countries at least since the 1960s. To provide markets for U.S. yarn and fabric producers,
the trade preference programs for the most part require U.S.-made yarn and/or fabric to
be used as inputs for textile and apparel end-products made in designated beneficiary
countries for them to qualify for trade preference.
The Caribbean Basin Trade Partnership Act (CBTPA),3 as amended, is the main
legislation for the Caribbean program with respect to textiles and apparel. CBTPA
expanded the CBI preferential arrangements and, as later amended, extended through
FY2008 preferential treatment for imports of selected apparel items.
The U.S.-Central American/Dominican Republic economic relationship changed
dramatically under CBTPA, creating an environment in which businesses forged strategic
partnerships in the increasingly complex regimen of textile and apparel manufacturing.
In a paradigm of coordination, components are routinely produced in countries other than
where the end-product is assembled, end-products are produced mainly for export, and
all are in close touch with each other.
With respect to U.S. yarn and fabric producers, the CBTPA appears to have been
successful. U.S. domestic exports of fiber, yarn, and fabric to CBTPA countries, which
had been rising at least since the mid-1990s, increased sharply in 2001 and have risen
further since then, although not as rapidly. Such exports jumped 80% between 2000 and
2001, and rose 68% between 2001 and 2004. A roughly similar pattern holds for most
of the individual major fiber, yarn, and fabric categories, as defined in the Harmonized
Tariff Schedule (HTS), exported to CBTPA countries, with cotton fiber and cotton woven
fabric and knitted and crocheted fabrics recording the steepest gains. In 2004, these two
categories combined accounted for two thirds of U.S. fiber, yarn, and fabric exports to
CBTPA countries. Exports of special woven, tufted, and other products in HTS Chapter
58 doubled between 2000 and 2002, but have since declined (Table 1).4
2 The other two regions receiving such trade preference are Andean and Sub-Saharan countries.
3 Title II of P.L. 106-200.
4 For more on trends in U.S. exports of fiber, yarn, and fabric to trade preference regions, see
CRS Report RL32895, Textile Exports to Trade Preference Regions, by Bernard A. Gelb.

CRS-3
Table 1. U.S. Exports of Fiber, Yarn, and Fabric to CBTPA
Countries: Selected Major Categories and Total, 1996-2004
(millions of dollars)
Manmade
Manmade Special Woven,
Knitted or
Year
Cottona
Filamentsb
Staplec
Tufted, Etc.e
Crocheted Fabricse
TOTALf
1996
250.9
57.2
56.6
84.2
128.0
658.0
1997
276.8
78.6
62.0
120.9
136.1
771.7
1998
351.3
95.1
68.0
126.8
98.9
851.8
1999
181.4
78.0
62.5
140.4
90.6
672.5
2000
295.3
117.9
71.7
191.8
104.0
931.2
2001
607.5
139.2
176.4
337.7
270.0
1,676.8
2002
779.2
148.5
246.8
409.2
525.2
2,275.7
2003
820.1
175.7
292.4
220.4
799.4
2,462.3
2004
1,083.3
168.1
287.2
256.4
863.4
2,823.4
Note: Data are for domestic exports. All categories except “Knitted and Crocheted Fabrics”
include fiber, yarn, and fabric.
a. HTS Chapter 52. Excludes knitted and crocheted cotton fabric.
b. HTS Chapter 54.
c. HTS Chapters 55.
d. HTS Chapter 58.
e. HTS Chapter 60.
f. Includes HTS Chapters not shown separately.
Source: U.S. International Trade Commission (ITC), Trade Database, compiled from tariff and
trade data from the Department of Commerce, Department of the Treasury, and the ITC.
Table 2. U.S. Imports of Apparel from DR-CAFTA Countries
Year
Millions of $
Year
Millions of $
1997
6,982
2001
9,141
1998
7,641
2002
9,190
1999
8,229
2003
9,274
2000
9,122
2004
9,603
Note: Data are imports for consumption:
Source: U.S. International Trade Commission (ITC), Trade Database, compiled from tariff and
trade data from the Department of Commerce, Department of the Treasury, and the ITC.

CRS-4
On the other hand, even though Caribbean producers’ exports of apparel to the
United States have been rising (Table 2), those producers have been losing share of the
U.S. apparel market in percentage terms to Asian countries, because U.S. imports of
apparel from there have risen even faster.
DR-CAFTA Provisions and Objections
DR-CAFTA would eliminate duties on nearly all “originating” textiles and apparel
retroactive to January 2004. In general, to qualify as “originating,” all processing after
fiber formation (e.g., yarn spinning, fabric production, and assembly) would have to occur
in a signatory country, or be specified in the agreement in the section setting out the rules
of origin, through a change in tariff classification. The rules of origin for apparel
generally apply only to the component that provides the garment its “essential character.”5
Thus, a major difference between the general criterion for originating in DR-CAFTA
and the one in CBTPA is that components of a textile or apparel product under DR-
CAFTA could be made in the region as well as in the United States, whereas, for the most
part, they have to be made in the United States under CBTPA.
Also, there are a number of qualifications and exceptions to the DR-CAFTA general
criterion, including the following. While generally requiring that inputs from “yarn
forward” be made in signatory countries, fiber forward is required in some cases. The
origin of collars, cuffs, and invisible linings would not be considered in determining
whether an item of apparel qualifies as originating. Woven goods made in Canada or
Mexico would qualify as originating, subject to quantity limitations and with a two-part
proviso.6 In the cases of a few quantitatively important products, only one
“transformation” (e.g., from yarn to fabric) would be needed to qualify as originating. A
textile or apparel good containing one or more of a lengthy list of fibers, yarns, and fabrics
considered to be in short supply in the United States would be treated as originating
regardless of the origin of such components. For the first 10 years of the agreement, the
United States would give preferential tariff treatment to a limited quantity of cotton and
manmade fiber apparel assembled in Nicaragua that do not qualify as originating. And,
for the first two years, the United States would provide preferential tariff treatment to a
limited quantity of tailored wool apparel assembled in Costa Rica that is not originating.
Consequently, there have been objections — to a great extent, owing to concern
about China, which has increased its share of the world and the U.S. apparel markets
greatly in recent years. For example, U.S. companies and workers see the allowance for
DR-CAFTA countries to use regionally-made components as directly and indirectly
damaging to U.S. textile producers — indirectly, because they fear lax enforcement that
will allow Chinese-made components to effectively enter the United States duty free
(illegal trans-shipment). Similarly, critics assert that the special provisions for Nicaragua
5 For a discussion of rules of origin in international trade and a comparison of such rules in U.S.
free trade agreements and trade preference programs, see CRS Report RL31934, Textile and
Apparel Rules of Origin in International Trade, by Bernard A. Gelb.
6 Those countries must (a) provide reciprocal treatment for U.S.-produced inputs under their free
trade agreements with other DR-CAFTA countries, and (b) agree to certain textile verification
procedures.

CRS-5
and Costa Rica, and the leeway to use Mexican or Canadian components, will result in
Chinese-made materials entering the United States duty free. Critics say many Chinese-
made goods already are smuggled into Mexico. It is obvious why the exceptions for
collars, cuffs, and invisible linings in determining whether an item of apparel would be
originating is meeting objections.
On the other hand, DR-CAFTA contains a safeguard provision specifically for textile
and apparel goods applicable during a transition period. If, as a result of the reduction or
elimination of a duty, imports of a good from another signatory country increase to the
extent that there is serious damage or a threat thereof to the domestic industry, the
importing party may increase or reimpose the duty to a specified level.
Impact Assessments and Industry Positions
Perhaps most important to U.S., Dominican Republic, and Central Americana textile
and apparel producers in assessing the potential impact of DR-CAFTA is how great any
alleged potential illegal Chinese inroads in legitimate DR-CAFTA trade would be.
However, at this point, it is unknown.
With respect to legitimate trade, while it is widely believed that Chinese producers
generally have a cost advantage over DR-CAFTA producers, the latter have the advantage
of geographical proximity that confers lower transportation costs and faster turnaround
at least with respect to shipping time. And given that Chinese-made goods still are
subject to tariffs, the expanded duty-free access to the U.S. market that DR-CAFTA
would provide would help DR-CAFTA producers. Thus, apparel makers in the
Dominican Republic and Central America see DR-CAFTA as a potential help in their
competition with Chinese-made goods.
Given the option in the agreement for components to be made in non-U.S. signatory
countries, the option to use Mexican and Canadian components, and other provisions,
U.S. yarn and fabric producers would tend to benefit less than DR-CAFTA producers
from the advantages cited above.
Abstracting from the China issue, the National Council of Textile Organizations
estimated that DR-CAFTA would incur annual losses to the U.S. industry of $1.0 — $1.8
billion.7 The U.S. International Trade Commission (ITC) said that DR-CAFTA “is likely
to result in a moderate increase in U.S. imports of textiles, apparel, and footwear from the
CA/DR region,” but the increase in U.S. imports of these goods from all sources is likely
to be small as CA/DR goods are likely to displace imports from other countries. The ITC
also estimated that DR-CAFTA is likely to result in a small increase in U.S. exports of
textiles, apparel, and footwear to the CA/DR region, and have a negligible impact on U.S.
output or jobs.8
7 Written submission to the ITC by Robert DuPree, Vice President, May 11, 2004, as reported
in the U.S. International Trade Commission report cited in footnote 9.
8 U.S. International Trade Commission. U.S.-Central America-Dominican Republic Free Trade
Agreement: Potential Economywide and Selected Sectoral Effects. USITC Publication 3717,
August 2004, p. 28 and 32.

CRS-6
On the whole, U.S. apparel manufacturing companies favor approval of DR-
CAFTA. While the agreement provides regional apparel producers more flexibility in
obtaining materials and other components than allowed under CBTPA, U.S. apparel
makers see greater advantage in changing the present unilateral preference program to a
permanent reciprocal “economic partnership” that, by strengthening the economies of the
region, will maintain their stability and foster predictability for U.S. businesses. Also,
they say, it “help determine whether .....imported garments are made in central America
and the Dominican Republic using U.S. inputs.....or in some other area of the world using
somebody else’s inputs.”9
Reflecting the portions of the industry that are more heavily represented in their
memberships, U.S. textile manufacturing trade associations have differing opinions of the
agreement. Thus, the National Council of Textile Organizations and the National Cotton
Council support DR-CAFTA.10 The yarn spinners in the former group and the various
segments of the cotton industry see continued, or even expanded opportunity arising from
DR-CAFTA’s provisions, given the yarn forward requirements, albeit partial, and the
limited cotton producing capacity of the regional countries. The American Manufacturing
Trade Action Coalition and the National Textile Association oppose DR-CAFTA.11 With
greater representation of fabric producers, they see the provisions of the agreement
allowing apparel made from regionally-produced fabric to qualify for duty-free entry into
the United States as potentially diminishing their market in the Dominican Republic and
the five Central American countries.
Most U.S. textile and apparel importers, which include retailers, support approval
of DR-CAFTA. They expect lower prices to result from the agreement, enabling them
to compete better with goods obtained elsewhere and/or sell greater quantities to
consumers as a consequence of lower prices.
UNITE HERE, a major union representing textile and apparel industry workers,
among others, opposes the agreement. UNITE HERE sees DR-CAFTA as potentially
costing U.S. jobs. Moreover, DR-CAFTA’s rules, UNITE says, are designed primarily
to facilitate and protect foreign investment by large multinational corporations. These
rules, UNITE adds, would make large corporations more mobile and less accountable to
local communities and governments, “dramatically shifting the balance of power” away
from democratically elected governments and towards private companies, and increasing
the bargaining power of employers vis-à-vis their workers.12
9 American Apparel and Footwear Association. Letter to President George W. Bush, April 13,
2005.
10 National Council of Textile Organizations. “NCTO Board Votes to Support DR-CAFTA,”
Textile News and Information, May 9, 2005; National Cotton Council. “Industry Affirms Support
for DR-CAFTA,” press release, May 10, 2005.
11 American Manufacturing Trade Action Coalition. AMTAC Reaffirms Opposition to CAFTA,
Agreement a Job Killer,” press release, May 9, 2005; National Textile Association. “NTA
denounces CAFTA as a threat to U.S. textile industry, December 18, 2003.
12 Statement of Mark Levinson, Chief Economist, UNITE HERE, before the Senate Finance
Committee on the Dominican Republic–Central American Free Trade Agreement, April 13, 2005.